NYSE Short Selling rose to yet another high. For the monthly period ended May 15, short interest on the NYSE rose 7% from mid-April. Market-wide,
the short ratio, or the number of days’ average volume represented by
the outstanding short positions at the exchange, was unchanged at 7.4. (next NYSE short-interest report is June 22)

Perhaps a better way to look at short interest is by comparing the ratio of shares sold "short" versus the total shares outstanding.

Throughout the entire 1990s Bull run, the short interest relative to the total outstanding float was fairly flat. It wasn’t until 2000 that the actual float began to move higher as a percentage of total shares outstanding. The same phenomenon seems to be occurring since mid-2006.

>click for larger chart[2]

Bloomberg chart created in conjunction with Peter Bookvar of Miller Tabak

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Its difficult to draw any firm conclusions about the forecasting acumen of this chart, given the lack a deep set of historical examples.

Additionally, given all of the M&A, some of this short interest is likely to be not actual shorting, but arbitrage activity. Then there are the derivatives, some of which may be creating short interest also.

Let’s just say this: large short interest creates a potential bid beneath markets, while rapidly rising Relative Short Interest/Total Float is potentially worrisome, especially when it occurs after the first market break (as in mid 2,000).

In other words, the Bears eventually get it right, but to have better odds of short positions being correct, it helps for there to be a major long term trend break to confirm the short sellers; that’s a major signal which is missing at present.